Picking the right sponsor
Most passive investors team up with a sponsor (also known as a general partner or syndicator). It’s very important to pick the right sponsor to invest with. The right sponsor is important because he/she is responsible for picking the right market, the right property, the right strategy and the right management team. The sponsor is ultimately responsible for the success or failure of the investment.
Here are some questions to ask when you’re looking for a sponsor.
Here are some questions to ask when you’re looking for a sponsor.
- Who are the sponsors? How well do you know them? Are they someone whom you can trust with your money? Do they have a team of professionals behind them?
- Understand the sponsor’s approach. Is their main strategy yield, value, or hybrid play? Does it match your goal? Make sure the sponsor has skin in the game. Does the sponsor understand what kind of property to buy? How to operate it and how to add value? Do they have a good understanding of economic cycles and a plan to ride out the down cycle?
- References. Always check a sponsor’s references. Contact the references and ask detailed questions about how these investors felt about working with the sponsor. Was the sponsor trustworthy and transparent?
- Understand apartment investing. Make sure the investment fits your criteria.
- Does the sponsor communicate well? Are they easily available? Are they open about all information? Do they answer your questions satisfactorily?
- Can the sponsor solve problems? There are always unexpected issues that come up in real estate investing. Can they give you an example of how they solved a major problem in the past?
- What is the sponsor’s track record? Ask for facts and figures about how well they’ve done with the deals they’ve participated in. They should be completely open and transparent with you, and should not hold any information back.
- What is their investment philosophy? A good sponsor should be principled and conservative in their numbers and assumptions that make up the business plan and investment performance projections. They should not promise the moon to you, but should focus on capital preservation and conservative underwriting to ensure that your investment is protected.
- Review the numbers. Ask detailed questions about the payout plan, sponsor fees, and legal structure of the deal. Think about hiring an attorney and/or accountant to review the paperwork.